Trusts and Estates 101: From Those In The Know To Those Who Need To Know

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Elections (may) Have Consequences: The Fiscal Cliff and Estate and Gift Taxes

For much of 2012, the looming changes to the tax rates and exemptions set to go into effect in 2013 have weighed heavily on all discussions of estate planning. The so-called “Fiscal Cliff” and the 2012 Presidential and Congressional elections left planners with uncertainty of whether the scheduled sunset provisions of the Bush/Obama tax cuts would go into effect or if Congress and the President would strike a deal before year’s end.

Tuesday ‘s election ended some of the uncertainty with regard to the respective players in this debate and what type of leverage they would have. President Obama won a second term as President while in Congress, the Democrats extended their majority in the Senate. In the House, Republicans retain control, albeit by a slightly slimmer margin. In the days following the election, the three lead players in the upcoming negotiations (President Obama, Speaker of the House John Boehner and Senate Minority Leader Mitch McConell) each expressed their positions with each retaining their previous stance on increasing or retaining existing tax rates and exemptions.

Earlier today, President Obama announced that he will meet with Congressional leaders next week to begin working on a deal to avoid the Fiscal Cliff. The possible outcomes are several:

The President and Congress will agree to a comprehensive deal-Both sides have indicated a desire to achieve a deal on both tax issues and spending cuts. But despite the results of the election, there appears to be no true bridging of the two sides polarized positions. This may change after next week’s negotiations, but such a change would reflect a major shift in tactics and attitudes.

The President and Congress will agree to a temporary, non-comprehensive plan-In his press conference today, President Obama stated he was ready to sign into law the permanent extension of the income tax rates for 98% of all taxpayers. The Senate has previously passed such a bill, but the House has refused to even vote on it. It is possible that they will now agree to separate those tax rates from other issues, but that remains unlikely. More likely would be a temporary extension of the current tax rates and exemptions similar to the extension passed in 2010.

No deal is reached before the end of the year-If no deal is reached before the end of the year, the tax rates and exemptions revert back to their pre-President Bush levels. While this may be frowned upon by many financial analysts, this would change the political dynamic significantly and may force one or both sides to finally come to a comprehensive deal.

A deal is reached on issues other than estate and gift tax rates and exemptions-The previously mentioned Senate bill made no mention of any extension, increase or decrease to the estate and gifts taxes. During the Presidential campaign, neither candidate spent much time discussing these transfer taxes. For those reasons, it would not be surprising to see the income tax issues resolved while the gift and estate tax issues are left to sunset and possibly be renegotiated in 2013.

If we are to believe the President, in any of these four scenarios, we should expect to see the federal estate and gift tax rates to increase and the respective exemptions to decrease come 2013. To best prepare for these changes, you should consider the following three pieces of advice:

1. Make 2012 gifts ASAP-The current gift tax exemption of $5.12 million is unlikely to ever return to this high level in the foreseeable future. For those with the means or the need to utilize a 2012 gift, it is already past the point of making more complicated gifts. With that said, by utilizing transfers to a grantor trust, it is still possible to make a 2012 gift today of cash, securities or even a promissory note and substitute harder to value assets in 2013.

2. Consider or reconsider the use of a credit shelter trust under your will-The lower estate tax exemptions that will likely go into effect will make using a credit shelter trust, a testamentary trust that allows property to pass estate tax-free at the death of both spouses, more attractive. Since 2010, such trusts were less appealing given the disparity between Federal and State estate taxes. If the exemptions are reduced, that disparity will decrease as well.

3. Speak to an estate planning attorney and stay informed. This is a fluid issue and things may change dramatically very quickly. It is important to keep in touch with your estate planning attorney to learn about any changes. If you do not have an attorney, you can also keep yourself updated by reading this and other estate planning blogs.

For more information about the 2012 Estate and Gift Tax changes, please contact info@levyestatelaw.com